What is Consigned Inventory? Pros vs. Cons and Best Practices

What Is Consigned Inventory December 18, 2020

Chloe Henderson

Writer

Traditional inventory poses a considerable risk to retailers, as they are required to make a hefty upfront investment with no guarantee of a profit. This can make it expensive to expand product lines.

However, consigned inventory allows retailers to offer various goods and services at no initial cost, reducing stock expenses.

What is Consigned Inventory?

In traditional inventory practices, the seller purchases merchandise from a manufacturer and immediately takes ownership of the product. Once the seller, typically a retailer or distributor, resells the products they receive the return on investment (ROI).

On the other hand, the original producer retains ownership of the consignment inventory until the distributor sells the product. Once the inventory is sold, the seller then pays the manufacturer. This allows sellers to return slow-moving merchandise that is restricting their cash flow.

The consignment model relieves sellers of the majority of inventory-carrying costs, placing the financial risk on the manufacturer. This is a common arrangement for retailers that offer expensive items, such as furniture and equipment, as well as seasonal and previously owned merchandise.

Pros and Cons of Consigned Inventory

Consigned inventory provides a unique set of advantages and disadvantages for the consigner and seller-

Retailers

In the consignment model, retailers are known as the sellers, giving them several pros and cons-

Pros

Lower Cost of Ownership - Retailers can pull consigned goods without gaining ownership, which lowers the ownership and holding costs.

Minimal Financial Risk - By not having to pay for products until after they're sold, retailers do not have to undertake holding hosts or make a large upfront investment.

Improved Cash Flow - Without procurement and storage costs, retailers can hold excessive amounts of consigned inventory from multiple sources to drive sales and improve cash flow. This minimizes the risk of stockouts and increases inventory turnover rates, as retailers can return unsold items.

Cons

Risk of Damaging Inventory - The longer retailers hold on to inventory, the higher the risk of items getting damaged by customers and everyday wear and tear.

Risk of Stock Count Errors - Due to ownership differences, consignment inventory needs to be handled separately from traditional stock. If inventories intermingle, retailers may accidentally count products together, resulting in shipping delays and inventory errors. This also makes it difficult to locate items if retailers wish to return inventory to the manufacturer.

Vendors

Vendors are known as the consigners or the company that provides the inventory. In contrast to the retailers, vendors face other benefits and risks-

Pros

New Markets - Since retailers do not have the financial risk of sourcing inventory, they are more likely to house new products. This gives vendors the opportunity to penetrate new markets and test different types of products.

Low Inventory Carrying Costs - By splitting up storage obligations between retailers, vendors can reduce their carrying and warehouse costs.

Direct-to-Retailer Shipping - Rather than having inventory shipped to warehouses and eventually to retailers, vendors can deliver products directly to sellers.

Cons

Cost of Unsold Inventory - Since vendors still own the inventory while it is housed by retailers, they must count it towards their expenses. This means that the longer sellers hold the product, the less profit the vendor collects.

Inconsistent Cash Flow - Vendors do not receive payments until the inventory is sold, making cash flow uncertain. Therefore, if retailers experience slow-moving stock, it could be a matter of months before the vendors receive a payout. Retailers may even return products, resulting in zero profits and increased carrying costs.

Best Consigned Inventory Practices

While the consignment model is an excellent option for some businesses, its unique pros and cons make inventory management vital. Therefore, companies wanting to source consigned inventory should consider the best management practices-

Consignment Inventory Agreements

Vendors and retailers must settle on a strict agreement to avoid confusion regarding ownership and finances. The contract should provide benefits for all parties involved and clearly outline-

Time Limits

Preferred Payment Methods

Ownership Rights

Shipping Responsibilities

Return Policies

Liability for Damaged Inventory

Commissions

Minimum Deposits

Tracking Methods

Management Responsibilities

Consignment Inventory Technology

Whether most of the consigned inventory is held by the supplier or retailer, businesses must have an established tracking method to monitor products. Manual methods, such as spreadsheets, do not have the capabilities to efficiently track inventory activities.

With inventory management software, companies can invoice, locate, and transfer inventory across several locations at the click of a button. This makes tracking stock throughout the supply chain fast and easy. By automating inventory with a management system, businesses can also improve their cycle count accuracy, analysis, and visibility, and connect with third-party partners.

Collaboration

The responsibility of marketing, advertising, and sales should not fall on one single party. Instead, the vendor and seller should collaborate resources to ensure they are able to meet customer demand. This way, both parties can benefit from inventory turnover.

Sales Channels

Vendors should reach out to retailers across several sales channels to improve brand exposure and attract more customers. While there are traditional consignment shops, suppliers can also establish work with e-commerce sites.